Despite policy, developers still don’t have to pay back taxes to get City Hall incentives

A development project leaving local governments holding the bag for hundreds of thousands of dollars in taxes and infrastructure may seem like a deal-breaker, but it won’t necessarily stop the cash flow to developers from City Hall.

Over a period of about five years, an investment group involving Lawrence businessman Doug Compton racked up delinquent taxes and special assessment payments, but that doesn’t bar him from applying for additional tax breaks. That’s because the city’s economic incentives policy only prohibits those with “currently delinquent” taxes. That means when indebted properties change ownership or are auctioned off due to tax foreclosure — even if the auction leaves the city eating costs — the developers still qualify for incentives.

Some city leaders think the incentives policy, which was overhauled last year, should remain as is, but others think it should be more restrictive. Commissioner Leslie Soden said she thinks the situation takes advantage of the city’s policy.

“That’s how we create a society, is by having what should be a level playing field for individuals, but instead it just seems that there are all these loopholes that businesses find and take advantage of that individual citizens can’t,” Soden said. “And it’s just not fair.”

Soden and Vice Mayor Lisa Larsen said they think the commission does have discretion when considering future incentives under such circumstances, but Mayor Stuart Boley was wary about not following the policy as it stands.

“Rather than make up some criteria for myself outside of our policies, I think it’s important for us to actually communicate with the public and communicate with the development community clearly,” Boley said. “And that’s what we’re trying to do through our policy.”

How much discretion the commission has in deviating from the policy will likely be tested soon, as a pending economic incentives application for a downtown grocery store and apartment project indicates Compton is likely to join the project once he is in good standing with the city’s incentives policy. The situation also calls into question whether the policy as written is effective or whether it should be less forgiving.

When an investment doesn’t pay off

In December 2016, the Journal-World reported that two investment groups that include Compton, Fairfield Investors LLC and Eastside Acquisitions LLC, had fallen behind on the property taxes and special assessments on 18 properties in eastern Lawrence. At that time, those back payments amounted to $1.73 million, but that total increased as additional taxes and interest added up. Though not all the city’s costs have been recouped, those investment groups are now current on their taxes. A combination of events, including substantial payments, brought Compton and his partners back into good standing with the taxing authorities and the city’s incentives policy.

For one, the investment groups paid about $1.58 million in delinquent taxes in July 2017, according to the Douglas County Treasurer’s Office. About $680,000 remains unpaid, but those properties are no longer in the name of the investment groups. In a statement to the Journal-World, Compton said he was largely responsible for addressing the tax issues.

“(Doug Compton) was one of several investors involved throughout the project but has been one of the only ones to get the past due balances paid,” the statement says.

Soden said she thinks it’s great that a large payment was made, but that she finds the situation disappointing.

“Considering that’s his tax liability and responsibility, I’m not going to throw a ticker tape parade for someone who paid their taxes,” Soden said. “And that doesn’t excuse someone for not paying their taxes on other properties. I find it very frustrating and disappointing.”

One of the 18 properties went to tax foreclosure last year and was auctioned for $1, essentially wiping out about $180,000 in delinquent taxes, special assessments, interest and fees. Another five properties owe a combined $680,000 and are scheduled to be auctioned off in the next tax foreclosure sale, according to the Douglas County Treasurer’s Office.

The investment group did not pay taxes on those five properties from 2012 to 2016. Sometime last year, Emprise Bank, which holds the mortgage on the properties, took over ownership. The transfer of ownership puts the investment group in good standing with the treasurer’s office, though, as the last such sale showed, the upcoming auction is not guaranteed to result in the city and county receiving their share of the total amount owed. Proceeds from tax foreclosure auctions generally go first to repay tax debt and then to other lien holders such as mortgagors, according to the treasurer’s office.

When recently contacted about the tax history of those properties, Compton referenced a statement previously provided to the Journal-World, in which he noted he was just one of six parties involved in the investments in eastern Lawrence. The area is located across 23rd Street from Lawrence VenturePark, a city-owned business park that has also struggled to attract buyers. Though the city created a benefit district that fronted the infrastructure costs for the properties, Compton also noted that the group supported the project for well over 10 years with millions of dollars of private investment.

Compton did not directly respond as to whether he thinks the circumstances follow both the letter and spirit of the city’s incentive policy. In addition to pointing to the history of the project, he noted that he has continued to make investments in projects in that area, such as a new apartment complex that will include affordable housing.

Considering tax history

Assistant City Manager Diane Stoddard confirmed that an applicant for incentives only needs to certify that they are not currently delinquent at the time of the application and formal consideration of incentives. Stoddard said the auctions and sales of delinquent properties would technically write off those debts, though it could be a factor when the commission determines whether to proceed with offering incentives, provided the city is aware of the situation.

Larsen said that while she doesn’t want to put it all on Compton’s shoulders, he is a part of the investment group and the tax history should be considered should he apply for additional tax breaks. She said she would ask for city staff’s help to ensure the commission understands the full picture for all incentives requests, which includes whether a developer has a history of being a good taxpayer.

“I think if it comes to the commission, that’s all information that I would need to have in order to make the decision that I believe is in the best interest of the city,” Larsen said.

Boley was more hesitant about deviating from the policy, saying developers look to the policy to know what is expected. He said he was aware of the significant payment that was made, and that not following the policy could be detrimental to future development.

“The reason that it’s important to follow our policy is because developers who are interested in investing in our community look to our policies to see how we do things,” Boley said. “So for us to have a policy and then deviate from it based on other criteria seems to me to be detrimental to our economic development policies and to our actual economic development itself.”

Though Boley said he does not currently have an interest in changing the policy, he said he would consider it if the public is interested in doing so.

Soden said she thinks that if a developer whose name was cleared via tax foreclosure or by the bank taking over can qualify for incentives, it’s a loophole in the city’s incentives policy, and it “still counts, in (her) book” as a violation of the policy.

Should the policy change?

The City Commission rewrote Lawrence’s economic development policy only a year ago, requiring development groups applying for tax breaks to disclose all partners in the project and whether they are involved with a property within the state that currently owes back federal, state or municipal taxes, special assessments or other debts.

Though Larsen said a developer’s tax history should be taken into consideration when considering new incentives, she doesn’t think the city should go as far as changing its incentives policy. She said the commission cannot codify every single thing that could happen.

“You just can’t legislate every single scenario,” Larsen said. “If there is wiggle room, someone will find it. That is where the discretion of the commission is going to come into play.”

Soden said she thinks the policy should change, and that the commission should think about the spirit of the tax provision and spell it out more clearly.

“You look at the spirit of the policy when it was created, and if there’s loopholes that were created, then you close those loopholes,” Soden said. “That’s just standard policy amendments.”

Boley, while open to the discussion, said having “shifting policies” is unfriendly for development.

“If there is a need to change them, we need to change them,” Boley said. “But I think it’s challenging to do development, and to have shifting policies all the time while you’re trying to do that development is not being friendly to people who want to invest in our community.”

The Journal-World reached out to several local development attorneys about whether the tax provision of the city’s incentives policy is easy to work around, but did not hear back from an attorney willing to comment.

Compton is also part of existing incentives agreements, and Stoddard said those agreements, which she noted involve different partners, don’t allow the city to withhold reimbursements due to delinquent payments on other properties. Last year, the city sent developments at 900 New Hampshire Street that include Compton about $425,000 in tax reimbursements, according to figures provided to the Journal-World from the city. Other properties on New Hampshire Street are due to start receiving reimbursements this year.

The five properties previously owned by the investment group, now owned by the bank, that owe $680,000 will be part of an upcoming foreclosure auction, the date of which is yet to be announced. Stoddard said the downtown grocery and apartment project is continuing to address parking issues, and there is not a date set for when the incentives request will go before the commission for consideration.